The Gold Mine At The Bottom Of The Pyramid

Posted in Marketing & Strategy Articles, Total Reads: 3229
, Published on 15 June 2012

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The definition of market underwent a glaring change over the ages from being just a physical place to any media that can support transaction. The markets of today can exist over internet, emails, and telephone lines. Markets are broadly of two types: Industrial markets and Consumer Markets. The scope of this article is limited to Consumer Markets.

Consumer markets are directed to buying and selling of goods and services for private consumption. These markets can be categorized on the basis of different parameters. The most used parameter for classification is household’s income on the basis of which Tier1 to Tier4 customers are defined.

It is not a hidden fact that market catering to Tier1 and Tier2 consumers has either saturated or is on the verge of saturation. In order to further scale up profits, the companies have to look for ways to penetrate the untapped market. There are however certain roadblocks which prevent companies from tapping the gold mine at bottom of the pyramid (BOP).

Some of the business myths that companies still carry with themselves are:

Myth#1: People at the bottom of the pyramid are neither interested nor can afford latest technologies/products/services

Reality: The success of Grameen bank whose approximately 95% users are rural women; one who had never before used banking services is an evident example that the above myth does not hold ground. Adding to the list are initiatives like SELF rural electrification system for villagers who are willing to bring electricity to their homes and small businesses and CorDECT ‘s telecommunication services for people who have never before made single phone calls in their lives .

Myth#2: The only concern for people at bottom of pyramid is to meet their basic necessities and they use their savings only for meeting these needs.

Reality: People at BOP are more concerned about their present consumption rather than savings for future. They tend to indulge in buying products and service from their disposable income sometimes at higher the price than is available to someone at top or middle of pyramid.

Warden Road

Dharavi

Cost of credit

12-18%

600-1000%(moneylenders money minting machine)

Phone-call per minute

~$0.025

~$0.04

Diarrhea medication

$2

$20

Rice per kg

$0.24

$0.28

Source: http://hbswk.hbs.edu/archive/3180.html

Myth#3: The Company’s current processes and cost structures cannot be made robust enough to support this set of customers.

Reality:Disruptive innovation in product, process and distribution is the key to contain costs and scale operations to support huge volumes at low cost and high quality. Disruptive innovation requires a company to be open to organizational readjustment whenever required and sometimes a willingness to cannibalize the business of its mainstream product to give way to its disruptive product in the market.

Myth#4: BOP market is not suitable for long term viability of business

Reality: The only market that can sustain a business in future decades to come is the BOP market as the premium and super premium segments already stand at verge of saturation. The need is not to see poor or lower middle class people as people in need of charity rather as potential customers. Charities or aids are inherently not sustainable .

“Like the tip of an iceberg, the opportunity remains invisible to the corporate world.”

—Dr. C. K. Prahalad and Prof. Stuart Hart

Dr. C.K Prahalad and Prof. Stuart Hart, the articulators of the term “Bottom of Pyramid” , have talked about four core elements that are sure shot keys to thriving profitably and successfully in Tier 3 and 4 markets. They are:

Creating Buying Power

Shaping Aspirations

Improving Access

Tailoring local solutions

And many companies have successfully done this.

For instance, Cemex, world’s third largest cement manufacturing company has brought about an innovation in “affordable housing for poor” through its initiative Patrimonio Hoy. It sells cement to poor people in small quantities (1 bag at a time) along with technical advice so that they can build one room at a time for themselves.

HUL, India’s largest consumer goods company started Project Shakti which successfully incorporated all the 4 keys together i.e creating buying power by providing income generating opportunities to rural women, shaping aspirations through educating consumers and sustainable development , tailoring local solutions through strategic changes and package innovations and improving access by penetrating deeper into the rural markets.

Godrej and Boyce came up with a breakthrough innovative cooling solution Godrej Chotukool, a low cost, low power, noise-free and easy to maintain product that not only brought comfort and convenience to owners but also helped in improving supplementing income of small entrepreneurs like florists, milk vendors, small sellers of cool drinks etc. This product not only helped these small entrepreneurs in reducing their wastage but also brought down their daily transportation costs of procuring materials.

Conclusion:

BOP market stands currently at the monstrous number of 4 billion and is forecasted soon to rise to 6 billion. This huge chunk of market which represents two-thirds of world’s population currently cannot be left unthought-of.

Operating in BOP market comes with its own set of risks which businesses, one of the most important of which is Cannibalization. There are possibilities that the new disruptive product cannibalizes the market of the mainstream product of the company; but that essentially would mean replacing one cash stream by another one which is more sustainable.

The greatest managerial challenge in serving a BOP market is to manage costs while providing with good quality and that too sustainably and profitably. This requires disruptive innovations and wiping out of inefficiencies in scale and scope of operations and management knowhow. Innovative strategies like pay per use, group ownership and accountability etc have proved extremely successful in catering to BOP markets. Organizations need to remodel their businesses and strategies and think innovatively to succeed in these markets.